- Never overpay taxes. Look at how much income tax is being withheld from your paycheques. If it’s more than necessary, you can arrange for your employer to deduct less. That usually means your tax refund next spring will be smaller. But the great trade-off is that, with more money in your account now, you have the opportunity to start benefitting from the time value of compounding income and tax sheltering, if you select your investments well.
- Diversify your income sources. Remember that ordinary income—employment, pensions and interest, for example—will attract a higher marginal tax rate than dividends and capital gains. By taking care to receive income from a variety of sources, you can “average down” the overall marginal tax rates you pay.
- Split income. If you can arrange to split both income and assets as evenly as possible with family members (such as by contributing to your lower-income spouse’s RRSP, or employing your teen at a fair market wage in your side-hustle business), the family unit as a whole will pay less tax. Keep in mind there are some strict rules in place to minimize income splitting. Ask your tax advisor about the attribution rules that may be invoked on certain types of income when any property is transferred or loaned to a relative, as well as the new tax on split income rules for dividends and other earnings distributed to family members from privately-held corporations.
- Maximize RRSP* contributions. Look for your personal RRSP contribution room on your Notice of Assessment from CRA, and contribute the maximum if you can. This can help you save on taxes payable, but also receive, or keep more from social benefit payments like the Canada Child Benefit or EI benefits.
- Top up your TFSA*. Invest your tax refund into a Tax-Free Savings Account (TFSA), topping up to the maximum contribution room available. (And if you have extra cash, do the same for other family members, as well.) TFSA holdings grow tax-free.
- Pay all taxes on time. Income taxes, sales taxes, payroll remittances and installment remittances all attract expensive interest and penalties for late payment and, in severe cases, can result in the seizure of assets or garnishee of wages.
- Don’t be afraid to use the D-word. Wealthy families understand it’s critical to discuss whether assets will be transferred during a taxpayer’s lifetime or at death, at adjusted cost base or fair market value, as the case may be, to get the best after-tax results. (The moment of death is when the fair market value of assets must be reported for tax purposes.) Talk to your family about your instructions for wills, powers of attorney and health care directives.
- Start the conversation about cottage succession. Often, a family’s most significant asset is the cottage at the lake—home to multiple generations of memories. Who should inherit a property that contains so many emotions? It is difficult to plan for the transfer of this priceless asset with stone-cold business precision. But in the absence of a sound financial discussion when everyone is healthy, both the asset and family relationships can wither in disrepair and initiate costly legal battles. Good tax planning can be a compelling reason to at least start the conversation.
Bottom Line: Multi-generational tax and investment planning keep wealth in the family. That can result in financial empowerment for everyone, with the right principles, processes and plans. Be sure to get started before that tax refund—and the long summer nights at the lake—are spent.
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Evelyn Jacks is Founder and President of Knowledge Bureau and the author of over 50 books on tax and family wealth planning. She tweets @evelynjacks
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